UPDATE 1-U.S. should let some big banks fail - Republicans

WASHINGTON, March 8 (Reuters) - The United States should
let some big troubled banks fail rather than commit more
federal funds to prop them up, two key congressional
Republicans said on Sunday.

Senator Richard Shelby, top Republican on the banking
committee, said the United States should not mimic Japan, which
in the 1990s propped up failing banks and prolonged its
economic downturn.

"Close them down, get them out of business. If they're
dead, they ought to be buried," Shelby told ABC's "This Week"
program. "We bury the small banks. We've got to bury some big
ones and send a strong message to the market."

Financial authorities have been under increasing fire as
hundreds of billions of dollars of loans and capital infusions
into distressed institutions have failed to halt the economic
downturn, which has only accelerated in recent weeks.

Senator John McCain, who remains a Republican leader after
losing the 2008 White House race to President Barack Obama,
criticized the new administration's response to the banks.

"I don't think they made the hard decision and that is to
let these banks fail," McCain told "Fox News Sunday."

As the U.S. government boosts its stakes in major banks
such as Citigroup Inc (C.N), talk of nationalization has
stirred a debate over how far regulators will go to help the
ailing financial system.

Shelby did not mention any banks by name but, when asked
about Citigroup, he said: "Citi's always been a problem
child."

McCain echoed Shelby's criticism of U.S. banks but both
senators avoided the term "nationalization" -- a concept
typically derided by Republicans as a move toward socialism.

Asked what should be done, McCain said: "You'd sell off
their assets and you have the -- unfortunately, the
shareholders and others will take a beating."

Tom Donohue, president of the U.S. Chamber of Commerce, the
nation's biggest business group, said it was "not practical to
talk about closing a bank that is integrated throughout the
whole global economy."

"It is practical to talk about buying some of those assets
away from those banks and holding them in an institution that
would have both public and private money," Donohue said on
ABC's "This Week."

On Friday, Kansas City Federal Reserve President Thomas
Hoenig criticized as piecemeal the approach taken by the
government in handling of the banking upheaval.

"We understandably would prefer not to 'nationalize' these
businesses but, reacting as we are, we nevertheless are
drifting into a situation where institutions are being
nationalized piecemeal with no resolution of the crisis,"
Hoenig said in remarks to a local group.

CALL FOR PATIENCE

A key Democratic senator called for patience as the Obama
administration takes stock of the current state of ailing
banks, announced last month as a series of "stress tests."

The Treasury department said it would provide the 20
largest banks with sufficient capital if the exams find they
need more funding to withstand a worse-than-predicted
recession.

"Once these evaluations occur, there may be some banks --
and we don't know which ones, and I'm not going to name any --
that will never make it," Democratic Senator Charles Schumer
said on NBC's "Meet the Press." "You don't just keep putting
money in, money in, money in -- and the bank never solves it
self."

Schumer, also on the banking committee, said there is a
type of "good nationalization" modeled on what the Federal
Deposit Insurance Corp. already does when it unwinds a bank.
(Additional reporting by Mark Felsenthal; Editing by Cynthia
Osterman)